The return of the Eurozone crisis

Last month Cyprus stood on the brink of becoming the first country to leave the bloc before a last-minute deal saved the nation’s banking sector and the government from bankruptcy. Meanwhile, Italian elections produced a stalemate, leaving Italy with a minority government that will struggle to vote policies through parliament without eventually returning to the polls.

More uncertainty in the UK’s largest trading partner is not what businesses need when attempting to export and invest in the region. However, firms should avoid a blanket approach to assessing the Eurozone’s economic environment. Our analysis highlights that investor perceptions of credit risk, as measured by government bond yields, evolved markedly over the last year (see Figure 3 below).

In particular, investors’ attitudes towards investing in Ireland and Portugal have improved, as their governments have got on with implementing tough structural reforms. Ireland can now borrow at a cheaper rate than Spain and Italy, where confidence that politicians can pass similar programmes has ebbed.

Cyprus is a reminder of how quickly events unfold in the Eurozone. Table 1 below identifies some key milestones in the next two months for businesses to look out for that may signal turning points in investor sentiment.

Table 1– Key Eurozone dates for your diary

April

May

Early April - Troika to resume talks on Greek structural reform measures and decide on disbursement of next €2.8 billion tranche of bail-out money